A few days ago, at a meeting of the board of a development stage angel investment, the subject of crowdfunding came up. Although none present had first-hand experience with crowdfunding, it sounded like it might be a good way to go about raising additional funding.

So, since that meeting, to advance my professional knowledge base, I’ve invested a few hours into researching crowdfunding*. The subject meshes well with my interest in startup financing and could be helpful to a couple of other projects with which I’m involved.

There is a lot of crowdfunding information available on the web – sources include bloggers, Wikipedia, vendors, lawyers, and the SEC. Many authors “have a dog in the fight.”

As the end goal of my research was to develop a prospect list of vendors (crowdfunding sites) that could help locate equity investors for for-profit projects in the US, I assumed this would be a simple, easy research project. Well, it wasn’t as simple as I’d assumed, because the term “crowdfunding” covers a lot, plus it’s a fairly new, rapidly growing activity. Plus, there are different types of crowdfunding with vendors in many different countries operating under different rules.

I learned fairly quickly that much of the chatter about crowdfunding is related to rewards-based crowd-funding. According the The Ultimate Crowdfunding Guide (“The Guide”) “Rewards-based crowd-funding is where contributions are exchanged for current or future of goods or services. Individuals or companies who launch campaigns may compensate contributors with something like a t-shirt, a copy of whatever they’re building or even just a thank you.”

The well-known crowdfunding sites, Kickstarter and Indiegogo, are confined to rewards-based fundraising.

Unfortunately, rewards based crowd-funding doesn’t work for the for-profit projects I have in mind. These projects need money in the form of equity funding and rewards aren’t a practical approach.

However, according to The Guide, “Equity crowdfunding cannot take place in the US at scale right now. That isn’t to say it can’t take place at all. It can and does. There are complex rules in current law that allow a company to sell stock to “accredited investors,” which is basically a fancy term for millionaires… The second problem for equity crowd-funding in the US relates to solicitation. In short, it is illegal to advertise the sale of stock.”

Uh-oh.

So, we have complex rules that, since the Jobs Act of 2012, the SEC is in the process of revising. Better talk with a good attorney!

However, notwithstanding the formidable legal issues surrounding fundraising in accordance with SEC rules, brave entrepreneurs have stepped into the ring and launched equity crowdfunding sites. US based equity crowdfunding platforms include:

As best I can tell, each of the above is no more or less than a lead generating site. That is, each enables a startup to publicize itself – to the site’s registered “investors’ and, in some cases, to the general public. What is unclear is the legality of each sites’ approach as well as how the downstream mechanics work to achieve money in the bank.

There are hurdles and a legal thicket. But let’s say we can (or think we can) get over them and raise money. Are there more issues to consider? Certainly! A main consideration, one the successful fundraiser will need to live with, is investor management and reporting. For more on this along with other downsides of crowdfunding, see this article on the “9 Dirty Secrets of Crowdfunding.”

Having spent a few hours looking into crowdfunding, it’s apparent that it’s complicated, more complicated than the vendors advertise. So I’ll continue to dig.